SECTION UPDATE
Tax Law Section Update
By Julian A. Fortuna
The Saylor Law Firm LLP
O
n Tuesday, March 26, 2013, the Tax Law Section held
a CLE Seminar on the American Tax Relief Act of
2012 (“ATRA”). The well-attended luncheon seminar
sponsored by AB Bernstein Global Wealth Management
featured a slide presentation entitled Paradigm Shift: The
ATRA-Math accompanied by a lively commentary from
Bernstein National Managing Director, Paul S. Lee. The
focus of the presentation was the impact of ATRA on income,
estate and gift tax planning for high net worth individuals and
business owners.
Paul began the seminar by reviewing pre-ATRA wealth tax
planning which typically featured lifetime use of estate and
gift tax exclusions and the avoidance of estate tax at every
generation with less concern for a step-up in income tax basis
at death because of the relatively low capital gain tax rates.
In other words, income tax consequences were often viewed
as secondary to estate, gift and generation skipping transfer
taxes. Moreover, the state of the taxpayer’s residence usually
did not significantly affect the overall plan.
To set the stage for the “Paradigm Shift” Paul next touched
on certain key tax provisions of ATRA including:
▪ Reunification of Gift, Estate and Generation-Skipping
Transfer Taxes
▪ $5.25 million Applicable Exclusion Amount 2013
(indexed from 2011)
▪ Maximum Gift, Estate and Generation skipping
transfer tax rate of 40%
▪ Portability of “Deceased Spousal Unused Exclusion
Amount”
▪ Significant increases in income taxes on wealthy
individuals, particularly on long-term capital gains and
dividend income
Paul then introduced the elements of what he called the “New
Paradigm” for income, estate and gift tax planning for high
net worth individuals:
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April 2013
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Estate Planning
▪ Multi-variable exercise depending upon age, asset level/
mix, income needs, etc.
▪Requires constant monitoring of the income and transfer
tax consequences
Applicable Exclusion Amount
▪ Use as little as possible during lifetime to preserve “stepup” in basis at death
▪ Rely on “zeroed-out” gifts to transfer wealth during
lifetime
Income Tax Considerations
▪ Can be more important than the transfer tax consequences
▪ Should be considered in tandem with potential transfer
taxes
Estate Tax Inclusion
▪ Can save more in income taxes depending upon asset
mix in the estate
▪ Should be forced if the income tax savings are greater
than the transfer tax cost
State of Residence
▪ Will give rise to very different types of estate and income
tax planning
▪ Factors favoring less estate tax planning: Community
Property State, High State Income Tax, State Gift Tax
(only CT), No State Estate or Inheritance Tax
▪ Factors favoring more estate tax planning: Separate
Property State, Low or No State Income Tax, No State
Gift Tax, High State Estate or Inheritance Tax
To highlight the shift in importance from wealth transfer
taxes to income taxes, Paul presented illustrations of the tax
burdens on a hypothetical New York City (“NYC”) resident.
Under prior law, that person was subject to a wealth transfer
tax rate of 55%, an income tax rate of 28% on dividends
and long-term capital gains, and an ordinary income tax
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